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What’s a Business Cluster and Why do Businesses do it?

What’s a Business Cluster and Why do Businesses do it?

Have you ever noticed similar businesses operating near each other? Read this article to learn about the business cluster and why businesses form them.

8th July 2019
Reading Time: 3 minutes

Are you thinking about starting a business? Are you reconsidering your current business’ location? By locating your business near other businesses you might be able to reap the benefits of a business cluster. In this article, we’ll explain what a business cluster is and discuss why businesses use them.

What is a Business Cluster ?

A business cluster is where many businesses from the same industry or of a similar nature operate in a given area. There are many different types of business clusters. A business cluster could include an area that has many businesses:

  • From the same market sector. E.g. Industrial businesses.
  • Related to the same industry. E.g. Businesses related to car products and services.
  • With a similar competitive advantage. E.g. A low-cost manufacturing hub such as Guadalaraja, Mexico,
  • Which have similar special skills. E.g. A manufacturing hub with expertise in technology such as Shenzhen, China.
  • That create new technology. E.g. A hub of high-tech businesses such as Silicon Valley, USA.

These examples show that there are many kinds of business clusters. The main criteria for a business cluster is that there are many businesses. Therefore, even a business park or CBD with all kinds of businesses is a kind of business cluster.

What are the Advantages of Business Clusters for Businesses?

Increased Productivity

By being close to other similar businesses, a company can easily access a broad range of relevant goods, services, knowledge and infrastructure. This will allow it to reduce the time needed to do tasks related to their business.

Increased Innovation

In a business cluster businesses can more easily collaborate with related businesses because as they are close by. This can assist a company with the creation of new products or services.

More Customers

More customers will go to the cluster area as there is a large range of similar products and businesses.

Increases Business Visibility

Small businesses are seen by more people because they are near other similar big businesses.

Improved Brand Perception

People might link a business with the quality of other products from the cluster in which it trades. E.g. Consumers may think a wine is good because they know the region it is from makes good wine.

What are the Advantages of Business Clusters for Customers?

Cheaper Prices

Having many similar businesses close to each other creates competition. Competition is good for customers as it drives down prices.

Broader Range of Products or Services

Where there are more businesses there are more goods and services for the consumer.

Comparison Ability

Consumers can easily compare similar products and substitutes because the businesses selling them are close together.

What are the Disadvantages of Business Clusters for Businesses?

Increased Competition

Operating in a business cluster can be hard for businesses because of the increased competition. Businesses operating in a cluster all compete for customers, resources, services and talented employees.

Commercial Spaces at a Premium

The best office or retail spaces in a cluster area will be even more sought after. This demand results in high rental prices.

Knowledge of Employees

Employees will always retain some specialised business knowledge from their time in the business. Therefore, if a business loses an employee to a competitor they also lose that business knowledge to the competitor.

Loss of Proprietary Knowledge

There will inevitably be a lack of secrecy surrounding a business’ innovations or new launches because many employees will be working in close proximity to employees of competing businesses.

What are the Disadvantages of Business Clusters for Customers?

May Limit Access to Businesses

Successful business clusters may reduce the number of certain businesses operating in other locations. This may reduce consumers access to such businesses in locations other than that of the cluster.

Summary 

In summary, business clusters are areas where many similar businesses operate in close proximity. Generally, there are lots of advantages to operating a business in a cluster. However, whether they can benefit your business will depend on individual circumstances.

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Author
Alex Moore

Alex is a Legal Tech Intern at Lawpath as part of the Content Team. He is in his fourth year of a Bachelor of Laws with the degree of Commerce (Majors in Entrepreneurship and Accounting) at Macquarie University. He is interested in Corporate and Commercial law.